Did a Lack of Business Ethics Cause the Current Economic Crisis

The oldest and possibly best definition of business ethics comes in Book 1 of the Nicomachean Ethics where Aristotle explains that "The end of economic management science is to create wealth in such a way that developmentally changes the actor and the external world''. In other words, the principle of business is to create wealth in a way that makes the manager a better person and the world a better place. It is possible to create wealth, be ethical, and be happy at the same time.

Ethical considerations figure into business decisions on a local and on a global level drafting a code of ethics, which portrays the ethical priorities that businesses should adhere to. These ethical priorities aim mainly at the just distribution of economic goods and services among individuals, who have the right to work, to free choice of employment, to favorable working conditions and remuneration, to equal pay and to protection against unemployment.

The current subprime financial crisis could be a perfect example of the Aristotelian viewpoint in regards to business ethics, but is not. To its bottom line, it does not create wealth nor does it make the world a better place. Instead, it is about some getting rich at the expense of others.

In the current financial crisis the main sources of criticism are the exercise of poor risk controls, the excessive leverage and the deliberate blindness to the bubble-like conditions in the housing market. These are the fundamentally economic causes for the crisis along with a rise in unemployment, liquidity crisis, inflation and high commodity prices. However, behind the economic causes, one could easily detect unethical behaviors and unequal distribution of economic goods.

In a well-regulated, market-based economy, which is driven by free trade and promotes economic growth, the least-advantaged members of the society should benefit from the mechanisms of the system as the system inherently absorbs any inequality. On the contrary though, the CEOs of well established firms that collapsed overnight such as Lehman Brothers, Bear Stearns and AIG got compensated with enormous payouts ($34ml, $38ml and $14ml respectively) practically for ruining their companies, while their employees lost their jobs and their customers lost their money. Apparently, the decisions taken by the executives were based on personal compensations, while their ethical considerations were sacrificed on the altar of big money. Once the financial industry got disconnected from its ethical base, financial firms looked up their short-term interest without considering the long-term impact on the customers, the U.S. economy and their employees.

It took the world almost ten years to understand what happened to Long Term Capital Management (LTCM), but most importantly to gain trust to financial firms again, until a bombardment of bailouts came to shake this trust. Bear Stearns ($29bl), the Federal takeover of Fannie Mae and Freddie Mac, AIG ($85bl), money market funds ($50bl), and the Emergency Economic Stabilization Act of 2008 ($700bl). As the big issue for any financial firm is trust, unethical behavior in the financial industry ultimately became so prevalent that trust faded away. This resulted in the collapse of the weakest, most leveraged and least-trusted firms, but also to the distrust towards stronger, less leveraged firms.

In conclusion, given that "the social responsibility of business is to increase its profits" as Milton Friedman so eloquently suggests, it would be fundamentally opposing for corporate officers to do anything else than trying to maximize corporate profit. However, as management is concerned with the way managerial decision making affects the company, while ethics is concerned with the way managerial decision making affects practically everything, managers inevitably become an inherent part of ethics and function under business ethics by carrying out management in the real world. And this is an intricate task to accomplish given that any human system has flaws including the varieties of political-economic systems and the varieties of capitalism.